FDR to Congress: don’t mess with the payroll tax

Effectiveness and alternatives

While some lawmakers have questioned the effectiveness of the payroll tax cut in stimulating the economy, most economists agree that the payroll tax cut does create some demand in that it puts money into the hands of many people who are likely to spend it. The Center on Budget and Policy Priorities (CBPP) has found that the average family would receive $934 in 2012.

And yet many economists point out that there are more stimulative measures that could be taken. The Congressional Budget Office has repeatedly found that extending unemployment benefits would offer more bang for the buck, because the unemployed are more likely to spend the money than those who have an income and might save it.

Citizens for Tax Justice found that a revival of the Making Work Pay Tax Credit (a program targeted to working class families that was replaced by the 2010 payroll tax cut) would provide just as much assistance to the poorest fifth of taxpayers as the Democrats’ new payroll tax proposal, but would be much more equitably distributed: Making Work Pay would yield the richest fifth of taxpayers $70 billion less than the payroll tax measure.

Low-income workers are most likely to spend any extra money they receive and boost the economy. But Making Work Pay did not pack the political punch that a payroll tax cut did because many workers did not realize they were receiving it, said Gleckman.

The CBPP argued in 2009 that the Making Work Pay Tax Credit provided more stimulus than the payroll tax cut extension. Now that the payroll tax cut has been implemented, however, Chuck Marr, the director of federal tax policy at the CBPP, said that it would be a mistake to return to higher rates. “In an ideal world, we would be doing this through the income tax, which would be more progressive, better-targeted, and there would be no concerns about Social Security,” he said. “But this is far from an ideal world.”

Andrew Fieldhouse, federal budget policy analyst at the Economic Policy Institute, said that spending measures are more effective than tax changes. Indeed, he said, almost any measure that spent money would provide more of a boost than measures that work through the tax code. “We’re only talking about this because Republicans generally support tax cuts,” he said. “If we were really talking about the best way to stimulate the economy, we would be talking about infrastructure spending and public works projects.”

Fieldhouse said that spending on infrastructure not only puts Americans back to work directly, it is also the only form of stimulus that leaves you with a tangible asset. “Infrastructure spending pays for itself in a way that tax breaks don’t because even when the money is spent, you still have a bridge or a road or a school, and that lays the groundwork for long-term growth.”

Most Democrats give in

In July of this year, 60 house Democrats signed a letter to President Obama opposing the use of a payroll tax cut for economic stimulus, saying, “Making it easier for enemies of Social Security to attack the program will surely outweigh any short term political or economic benefit or a deal that includes extending the current payroll tax cut or expanding it to include employers.”

Despite the abundance of more effective alternatives and the fears about eroding the credibility of the Social Security system, however, all but three Democrats in the Senate voted for the Democratic plan, and most Democrats in the House are planning to vote for an extension, as well.

Rep. Ted Deutch (D-Fla.), one of the three Members of Congress who organized the letter to President Obama, said that while he still has concerns that extending the payroll tax cut could make Social Security more vulnerable, the payroll tax cut is better than nothing.

“We’re at a moment when there aren’t a lot of options. This is the one option we have, and I’m going to take the President at his word that the trust fund will be replenished” he said.

According to Gleckman, the Democrats have designed their bill to draw distinctions with the Republicans for political gain. “They can say, ‘Republicans voted to raise taxes on the middle class and against raising taxes on the rich,” he said. “That’s a strategy that will probably work in the short-term, but Democrats are playing a dangerous game. If this leads to a discussion about reducing Social Security benefits, then they could pay a serious price in terms of the long-term consequences” because they may be perceived as having set the stage for broader changes to the program.